Accounting for the value of time passing
and the depletion of natural resources
Reconsideration and some suggestions
Ole Gravgård Pedersen
Statistics Denmark
Sejrøgade 11
DK 2100 Ø
+45 3917 3488
ogp@dst.dk
Main questions ?
What should the standard asset accounts for
exhaustible natural resources look like?
- Adapted form or generic asset account ?
- How do we value the effect on the stock value of
extracting a natural resource ?
- How do we explain the accounting items of the
depletion adjusted flow accounts and interprete
the results, especially if we partition the stock
value according to economic ownership ?
Outline of presentation
• Background
• The asset accounts and the measurement of depletion
- The agreed approach, some properties and problems
- An alternative measurement
• The depletion adjusted accounts and split ownership
– Agreed approach and some questions
– An alternative approach
• Some conclusions
• Some questions
Background
Decisions taken at the London
Group meetings in
Johannesburg and Rome
2007 (agreed approach)
SEEA 2003 asset
accounts
-several options
Decision on the measurement of
the value of depletion
But some outstanding issues:
?
Suggestion on
the recording of
split ownership
between
Government
and extractor
-Two measures of the ”effect on the stock value of the extraction”
-How do we use the generic asset account of the SEEA/SNA
- Strange results when the principles are actual implemented
The generic SEEA 2003/SNA asset accounts for natural
resources
Opening stock value (?)
…
- Depletion = "the reduction in the value as a result of the
physical removal and using up of the asset“ (?)
…
+ Revaluation (?)
…
= Closing stock value (?)
Often all items are non-observable
Using the NPV method when no market values
can be observed gives the following:
V1 = opening stock = NPV of all future ressource rents,
beginning of period 1
- RR = resource rent
= the surplus resulting from extraction of the natural
resource assets
= the output of the extraction industry minus
all costs involved in the extraction,
including the costs of using fixed capital
= immediate decline in resource rents due to extraction
now
+ rV1
= time passing element = effect of the discounting
= future ressource rents come closer
V2 = closing stock = NPV of all future ressource rents,
beginning of period 2
How do we combine the items from the NPV method with
the generic asset account items ?
Asset account
NPV
OK
Opening stock
=
NPV of future ressource rents beginning period 1
- Depletion (?)
?
?
+ Revaluations (?)
-RR, ressource rent/immediate decline
in income
+ rV1, value of time passing
(discount element)
OK
Closing stock
=
NPV of future ressource rents beginning period 2
The links for the change items are undetermined and requires
assumptions/decisions
Correspondance in SEEA 2003:
The NPV method used on oil and gas assets
Table 1. SEEA 2003 Monetary asset account for oil and gas
Opening stock
Extractions (resource rent)
Return to natural capital (revaluation due to time passing)
Discoveries and reappraisals
Changes in extraction path
Changes in the unit resource rent (nominal holding gains/losses)
Closing stock
698.8
-58.3
28.9
16.6
44
-21
709
SEEA 2003 Table 7.14 (bold added)
The value of extractions = RR
RR represents here the decline
in the value of the natural resource
due to the extraction
The time passing element =
revaluations/holding gains ???
This is an ”adapted” account which do not follow the terminology and
form of the generic SEEA 2003/SNA asset account !
But: The SEEA 2003 example and country practices (?)
seems to indicate the following link:
Opening stock
= NPV of future ressource rents, beginning period 1
- Depletion* = - RR
-RR, ressource rent
-/immediate decline in income due to
-the extraction
+ Revaluations = + rV1
Closing stock
+ rV1, value of time passing
(discount element)
= NPV of future ressource rents, beginning period 2
* In SEEA 2003 this item is called extraction instead of depletion
in relation to the asset accounts
In contrast, SEEA 2003 and the agreed approach does at
the same time define depletion = RR-rV1, which gives the
link:
Opening stock
= NPV of future ressource rents, beginning period 1
- Depletion = -RR + rV1
+ Revaluations = 0
Closing stock
-RR, ressource rent
/immediate decline in income
+ rV1, value of time passing
(discount element)
= NPV of future ressource rents, beginning period 2
This accounting approach is, however, not shown in SEEA 2003!
Therefore, for the revised SEEA, we need to improve the
clarity of the asset accounts for natural assets:
• The format, accounting items and terminology of the
generic asset accounts should be used
- depletion in stead of extraction,
avoid ”return to natural capital”
• In relation to the asset accounts there should only be one
value for the depletion, i.e. "the reduction in the value as a
result of the physical removal and using up of the asset“
How do we measure the reduction in the
asset value as a result of the physical
removal and using up of the asset“ ?
1) Agreed approach: d = V1-V2= RR - rV,
i.e. the ressource rent minus the time passing element
Depletion is the total change in the stock value,
including the effect on stock value due to the fact that
future ressource rents come closer and the time preference.
or
2) Alternative: d = RR
i.e. the ressource rent
The value corresponds to the ressource rent
which immediately disappears because of the extraction
Agreed approach: Depletion = RR-rV1
Background/rationale:
- The role of a natural ressource is the same as that of
fixed capital, and depletion is therefore defined in parallel
to the definition of fixed capital (change in NPV) leading
to the formula RR- rV1
- Instrumental for the adjusted income accounts
Agreed approach: Depletion = RR-rV1
Some properties:
• Depletion is determined by factors which are unrelated to the current
extraction ( future extraction, extraction profile, and discoveries).
Therefore an increase in the natural capital stock reduces the
depletion.
• Depletion is negative if RR<rV1
i.e. the result of the physical removal and using up of the asset is
that the stock value increases !
• The calculation of d = V1-V2 (= RR-rV1) must always be based on
constant price calculations of V1 and V2.
• Although in principle measured the same way as fixed capital (NPV),
this does seldom hold in practice
Alternative approach:
depletion = RR (ressource rent)
• Rationale:
• RR measures the immediate effect on stock value of the
extraction
if we didn’t extract, the ressource value would be RR
higher
• Under optimal extraction: RR = NPV of loss of future
extraction (i.e. RR is a cost of extraction measure)
• We would probably have to spend RR if we were going to
”replace” the extracted oil
• The time passing element can be seen as a revaluation of the
resource, and has as such nothing to do with the current
extraction
Alternative approach
depletion = RR (ressource rent)
Some properties:
• Depletion is independent of the total stock value (i.e.of
future extraction, extraction profile, and discoveries,
etc.).
• Depletion is never negative i.e. the result of the physical
removal and using up of the asset is always a decrease
in the stock value“
• The asset accounts can be calculated in current prices,
without calculating the constant prices accounts first.
• No assumption on a correspondence between natural
capital and fixed capital is made
Example: What does the agreed and the alternative measure look like:
Denmark’ oil and gas: Ressource rents (RR) and depletion (RR - 0.04*V1)
20
Bill. DKK (constant prices)
15
10
Discoveries
5
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0
-5
Negative depletion
Ressource rent (RR)
d=RR-0,04*V1
Can the time passing element (rV) be seen as a
revaluation?
• No:
Since the price on oil (and thus the ressource rent) is not
changing, the price on the asset must also be the same.
• Yes:
If the same quantity increases in value, a revaluation has
taken place.
A unit below ground and a unit above ground are
different commodities, and have different prices.
Depletion adjusted income accounts – agreed approach
Table 3. Agreed depletion adjusted generation of income accounts
Gross operating surplus
104.1
Less consumption of fixed capital
24.9
Equals net operating surplus
79.2
Less extraction of natural resources
-58.3
Plus returns to natural resources
28.9
Equals operating surplus adjusted for the depletion of natural resources
49.8
Based on SEEA 2003 Para. 10.38 and Table 10.4
Depletion
Net operating surplus
-depletion ( RR-rV )
= Depletion adjusted NOS ( NOS – RR+rV )
Time passing element
return (rV1) > RR: ???
Since depletion has been ”decreased” by rV this amount is per definition
left as return to capital and included in the adjusted NOS
Depletion adjusted income accounts – split ownership
SNA 2008: The asset is attributed to the legal owner
SEEA: Split ownership between government and extractor
Table 4. Agreed approach: Asset and adjusted income accounts with split
ownership and return to natural capital attributed to the extractor
Total
resource
Owner
Extractor
???
(Govern
ment)
Asset account
Asset
account
Opening stock
698.8
400
298.8
- depletion
-29.4
0
-29.4
= value of extraction
-58.3
0
-58.3
- return to income
28.9
0
28.9
669.4
400
269.4
Closing stock
Income
account
Adjusted income account
Net operating surplus
less extraction of natural resources
Plus returns to natural resources
equals operating surplus adjusted for the depletion
of natural resources
Rate of return to natural capital (per cent)
79.2
0
79.2
-58.3
0
-58.3
28.9
0
28.9
49.8
0
49.8
4
0
9.7
Depletion
and return
to natural
resources
???
Agreed approach under legal owner or
split ownership situation:
Charging the full depletion to the extractor and giving him
the full return to natural capital seems to lead to ”strange”
results:
The owner’s stock value is undetermined
and the return to capital is attributed in proportions we
would not expect.
Some solutions
1) The extractor gets it all (owner = extractor)
2) The owner gets it all and an annual capital transfer,
equal to the depletion, from owner to extractor is
recorded. (However, this does also lead to strange rates of
returns to natural capital at the sectoral level).
3) Alternative approach: the depletion (=RR) is charged
against the extractor, and the return to capital is taken
from the holding gains and allocated in relation to the
stock values
Alternative approach:
split ownership and split return to capital
Table 5. Alternative asset and adjusted income accounts with split ownership and return to
natural capital attributed according to ownership shares
Total
Owner
Extractor
economy
(Government
)
Asset account
Opening stock
698.8
400
298.8
- depletion (=resource rent)
-58.3
0
-58.3
+ Holding gains (due to time passing)
28.9
16.5
12.4
Closing stock
669.4
416.5
252.9
Adjusted income account
Net operating surplus
less depletion
Plus returns to natural resources (=holding gains from time
passing)
equals operating surplus adjusted for the depletion of natural
resources
Rate of return to natural capital (per cent)
79.2
-58.3
28.9
0
0
16.5
79.2
-58.3
12.4
49.8
16.5
33.3
4
4
4
Depletion
Split returns to
natural capital
= holding gains
The alternative approach
• Requires a new interpretation of the adjusted income
accounts:
– The income does not come from production, but from
the holding gains, (Hicksian income concept)
– We include gains as income because it increases our
wealth and consumption possibilities
– It opens for inclusion of other ”gains”, such as
discoveries and natural growth of uncultivated assets,
without including them as production
Some overall conclusions
• The ”agreed” definition of depletion (RR-rV) leads to
inconsistent and strange results, when NPV is used in
practice
• There is a need to streamline the definition and
presentation of the depletion and the asset accounts in
SEEA
• There seems to be some unresolved issues with regard to
the proposed split-ownership recording
Some overall conclusions, (contd)
• An alternative definition of depletion (=RR) and
accounting approach would remove the strange results
• Such an alternative approach requires a new approach to
the adjusted income accounts based on Hicks’ income
• The alternative approach removes the parallel approach
to accounting for fixed capital and natural capital
• The alternative approach is more flexible and does not
require changes in the production boundary of the SNA
Questions for the London group
• Q.1 Do you agree that the “reduction in the value of a sub-soil asset as
a result of the physical removal and using up of the asset” should be
unambiguously defined?
• Q.2 Do you agree that the generic asset accounting format (Table 2)
should be used instead of the adapted form (Table 1) when accounting
for natural resources?
• Q.3 Should the value of the “reduction in the value of a sub-soil asset
as a result of the physical removal and using up of the asset” be
valued as
• a) RR resource rent, (and the time passing element as holding gains)
or
• b) Equal to the resource rent minus the time passing element, RR-rV ?
•
Q.4 What is your view on allocating the time passing
element/return to capital in proportion to the the owners’
share of the natural resource stock value (Table 5)
instead of allocating it to the extractor (Table 4)?
• Q.5 The alternative approach argues that the time
passing as a holding gain can be regarded as income
because it increases the wealth (Hicks’ income).
Similarly, discoveries and the growth of an uncultivated
natural resource can be seen as income because it
increases our wealth and consumption possibilities.
What is your view on the alternative approach?